INTERNATIONAL ACCOUNTING HARMONISATION

INTERNATIONAL ACCOUNTING HARMONISATION

Harmonization is a process for improving the compatibility (compatibility) of the accounting practices by setting limits on how big these practices may vary. The harmonization of of accounting includes harmonization :

1. Accounting standards (related to the measurement and disclosure)

2. Disclosures made by companies related to the public offer and listing of securities on the stock exchange

3. Audit Standards of International Harmonization Survey

Advantages of International Harmonization :

1. Global capital markets and investment capital can move around the world without hindrance. High-quality financial reporting standards used consistently across the world will improve the efficiency of capital allocation.

2. Investors can make better investment decisions; portfolio will be more diversified and reduced financial risk.

3. Companies can improve decision making strategy in the areas of mergers and acquisitions.

4. The best ideas arising from the activity of the manufacture of standard pat deployed in developing global standards with the highest quality.

Major International Organizations Encouraging the Harmonization of Accounting

Six organizations have become major players in the determination of the international accounting standards and in promoting harmonization of international accounting:

1. International Accounting Standards Board (IASB)

2. Commission of the European Union (EU)

3. International Organisation of the Capital Market Commission (IOSCO)

4. International Federation of Accountants (IFAC)

5. Intergovernmental Expertise Working Group of the United Nations on International Standards of Accounting and Reporting (International Standards of Accounting and Reporting - ISAR), part of the United Nations Conference on Trade and Development (United Nations Conference on Trade and Development -UNCTAD)

6. Working Group on Accounting Standards of Economic Development and Cooperation Organization Working _Group OEDC).

DEVELOPMENT OF INTERNATIONAL ACCOUNTING HARMONISATION

Efforts to harmonize international accounting has been started a long time ago even before the formation of the International Accounting Standards Committee (IASC) established in 1973. In 1959, Jacob Krayenhof, collegue of the founder of European independent accounting firm mainly encouraged the making of international accounting standards should be started. In 1976, Organization for Economic Cooperation and Development (Organization for Economic Cooperation and Development - OECD) issued a Declaration of Investment in Multinational Enterprises, which contains guidelines for the "Disclosure of Information”.

In 1978, the Commission of the European Communities issued the Fourth Decree as the first step towards harmonization of European accounting. In 1981, IASC established a consultative group consisting of non-member organizations to expand input in the making of international standards. In 1984, the London Stock Exchange said that its party expected companies listed their shares but not incorporated in England and Ireland to adjust to international accounting. In 2001 the International Accounting Standards (International Accounting Standards Board IASB) replaced the IASC and took over responsibilities as of April 1, 2001. The IASB standard is referred to International Financial Reporting Standards (Intanatioanl Financial Report Standards-IFRS) and including IAS issued by the IASC. In 2002 the European Parliament approved a European Commission proposal that virtually the entire EU companies with their shares listed must follow the standards of the IASB commence no later than 2005 in the consolidated financial statements. In the same year the IASB and FASB signed the "Norwalk Agreement" which includes a shared commitment to the convergence of international accounting standards and the United States. In 2008, the Indonesian Institute of Accountants (IAI) on Tuesday, December 23, 2008 in the framework of its 51st birthday declared Indonesia's plan for convergence to International Financial Reporting Standards (IFRS) in the financial accounting standard setting. The setting of accounting treatment that is converging with IFRS will be applicable to the preparation of the entity's financial statements starting on or after January 1, 2012. This was decided after a review of in-depth assessment and taking into account all the risks and benefits of convergence to IFRS.

The compliance to IFRS has been carried out by hundreds of countries around the world including Korea, India and Canada which will perform the convergence to IFRS in 2011. Date from International Accounting Standard Board (IASB) shows that there are currently 102 countries that have implemented IFRS with varying degrees of necessity diverse. A total of 23 states allow the use of IFRS voluntarily, 75 countries require the use of IFRS for all domestic companies, and four countries require the use of IFRS for certain domestic companies. Compliance to IFRS gives benefit for the comparability of financial reporting and increased transparency. Compliance through the Indonesian company's financial statements will be comparable to the financial statements of companies from other countries, so it will be very clear which of the company's performance is better. In addition, the convergence program is also beneficial to reduce the cost of capital (cost of capital), increasing global investment, and reduce the burden of preparing financial statements. International Financial Reporting Standards (IFRS) as a reference for the development of financial accounting standards in Indonesia because IFRS is a standard that is very sturdy. The make-up is supported by experts and international consultative councils from around the world. They provide enough time and supported with literature feedback from hundreds of people from various disciplines and from a variety of jurisdictions around the world. With the declaration of the IFRS convergence program, then in 2012 all the standards issued by the Financial Accounting Standards Board IAI will refer to IFRS and applied by entities.

IFRS HARMONIZATION IN INDONESIA

Accounting standards in Indonesia is not currently using (full adoption) of the international accounting standards or International Financial Reporting Standard (IFRS). Indonesian accounting standards in force today refers to US GAAP (Generally Accepted Accounting United Stated Standard), but in some of the provisions it has already adopted IFRS as its harmonization. The adoption by Indonesia at this time is in nature of not completely changed, only some (harmonization). This current era of globalization requires an international accounting system that can be applied internationally in every country, or required the harmonization of international accounting standards, with the aim to produce financial information that can be compared, facilitate the competitive analysis and good relations with customers, suppliers, investors, and creditors. However, this harmonization process has constraints namely nationalism and cultural barriers in each country, the differences of government system in the country, the difference between the interests of multinational corporations with national companies which influence the process of harmonization between countries, and the high cost to change the accounting principles.

Importance of Accounting Standards Harmonization in Indonesia

Indonesia needs to adopt international accounting standards to facilitate foreign companies to sell shares in this country, or vice versa. However, to adopt international standards is not easy because it requires understanding and expensive dissemination costs . Indonesia has already done so but its new and further harmonization will be carried out over the full adoption of the present international standards. The adoption of international accounting standards is especially for public companies. This is because public companies are companies that conduct transactions not only nationally but also internationally. In case of a share purchase in Indonesia or otherwise, it will no longer be disputed the difference in accounting standards used in preparing the report. There are several options for adoption, use IAS as it is, or harmonization. Harmonization is that we are the one who determine which ones should be adopted, in accordance with needs. An example is the PSAK No. 24, it was fully adopting IAS Number 19. The standard number associated with employee benefits or employee benefit. Bapepam has given a signal to all companies going public about the loss will be encountered if we do not harmonize. In its statement, Bapepam explained that the losses associated with the capital market into Indonesia, or Indonesian companies listing on the stock exchanges in other countries. Foreign companies will find it hard to translate the financial statements as out national standard conversely, Indonesian companies listing in other countries, it is also quite difficult to compare financial statements according to standards in the country concerned. This will hamper the world economy, and the flow of capital will be reduced and not globalized.

Case of Phar Mor Inc

Phar Mor Inc, is included as the largest company in the United States which was declared bankrupt in August 1992 under the law of U.S.Bangkruptcy Code. Phar mor was a retail company that sold products quite varied, ranging from medicines, furniture, electronics, sports clothes to videotape. At the peak of its glory, Phar Mor had 300 large outlets in nearly every state and employed 23,000 employees based in Youngstown, Ohio, United States. Phar-Mor was established by Michael I. Monus or so-called Mickey Monus and David S. Shapira in 1982. Some stores used Pharmhouse name and Rx Place. The slogan of Phar-Mor was ”Phar-Mor power buying gives you Phar-Mor buying power”.  

Phar Mor Inc, was a dry goods retailer headquartered in Youngstown, Ohio, founded in 1982 by David Shapira and Michael I Monus. Monus as the President of Phar-Mor and heavily involved in the operations. Shapira, CEO of supermarket chain Giant Eagle, the largest shareholder of Phar-Mor and became CEO. The company grew quickly from one store in 1982 to more than 300 stores with sales of approximately $ 3 M in 10 years. The characteristic of the Phar-Mor stores, is that they always deliver discount goods with a large number of purchase. The merchandise such as video tape to prescription of drugs. In the 1980s, Youngstown was still shaken by the restructuring of the steel industry. Nearly 50,000 jobs were lost and many businesses were left downtown. Under the leadership of Monus, Phar-Mor became Youngstown biggest supporters and employees. Monus started by taking over two empty buildings in downtown, operated stores of Phar-Mor first and converted into other forms by means of emptying department stores, into the headquarters of Phar-Mor. The head office became the focal point of events in the city. Monus also supported the activities of fireworks at the center of the city and Camp Tuff Enuff, a risky program for children in that city. Monus represented University of Youngstown, where each family was assigned a business seat. Monus persuaded Ladies Professional Golf Association to hold a championship in Youngstown for people who are enthusiastic and sports fans. Then she tried to pull Denver Rockies after failing to persuade Major League Baseball as the franchise for a trophy of Youngstown. In 1987, Monus started a world basketball league, which consisted of 10 teams from each city.

Phar-Mor began to experience a loss in 1987. The loss was hidden from the monitoring of Monus and several subordinates did an increase in inventory, other assets, liabilities and other charges to cover the profit margins which kept on continuing to shrink. Two sets of books were stored, the company great books that contained false statements and great books hidden which kept on posting false alarms. Such measures to cover losses and allow them to ask for a bonus of performance as well as maintain access to capital markets and credit application. The financial statements which were incorrectly used for the purpose of credit worth $ 1 billion as additional capital from investors, including Sears, Roebuck & Co, Westinghouse Electric Corp; some developers of mall  Mr Edward DeBartolo; and corporate partners as an affiliate from Lazare Freres. As the company's financial condition worsens, they depended on the payment from suppliers to hide the company's losses. Suppliers such as Coca Cola Enterprises Inc, Fuji Photo Co and Gibson Greetings Inc paid amounted to $138 million between 1988 and 1992 in exchange for Phar-Mor's for not being their brand competitor. Phar-Mor bought some of its goods with suppliers known or have a relationship with the executives or directors of Pahr-Mor. For example, the company hired a number of telephone equipment from a company partly owned by Monus. Sold sportswear from the presemce of World Basketball League. Costume jewelry purchased from Jewelry 90, Youngstown purchased some jewelry from wholesale in New York. Jewelry 90 was owned by David Karzmer, a business colleague of Monus. Michael Monus’s father, was the director of Phar-Mor, working as a consultant from Jewelry 90. He was paid $354,754 to work for six months in 1992. If Phar-Mor purchased directly from wholesale in New York, then it will save $ 2.1 B. During the summer of 1992, Youngstown travel agent told Edward DeBartolo as the independent shareholders that the unit of Phar Mor has made payments totaling $ 80,000 for completing the World Basketball League delinquent accounts. DeBartolo forwarded the information to Shapira, to perform an internal investigation to Phar-Mor. Investigations revealed that DeBartolo only looked at the peak of a problem. For several years, Monus has distributed a number of funds of about $ 10 million to the World Basketball League. As a general partner in the league, 60% of her as a controller of each team, thus Monus was responsible for financing the league. The team owner said that every time they needed money, they will contact the financial director Phar-Mor or contacts to the small business division and the money will be sent. Monus was also using as much as any money for personal use, including $ 180,000 for a house with an area of 18,000 square feet anew he built, complete with basketball court. A number of other officers and directors have benefited at the expense of Phar-Mor. History records the case as a case of Phar mor inc legendary among financial auditor. Phar Mor executives intentionally committed fraud to obtain financial benefits coming into the pocket of private individuals in the ranks of top management of the company.

 Analysis :

In the case of Phar Mor Inc the company committed a  fraud, top management of Phar Mor made two financial statements namely, inventory statement and monthly financial report. And the two reports were then doubled by the management. One set of inventory report containing inventory report that was true, whereas one set of other report containing inventory information adjusted and addressed to external auditor. As well as with the monthly financial report, the true financial report contained losses experienced the company intended only for executives. The other is a report that has been manipulated so as if the company gained enormous profits. In preparing these reports, the management of Phar Mor deliberately recruited staff of public accountants (KAP) Cooper & Lybrand, those staff then helped played in the fraud and in return has made multiple statements they were given a position of importance. In the case of Phar Mor, the function of control environment was developed. Control environment was greatly determined by attitude from the management. The idea is that, a management must support fully an audit internal activity and declare that particular support to all operational personnel of the company. The top management of Phar Mor did not show good attitude. The management then actually recruited staff of auditors from KAP Cooper & Librand to also played in fraud to obtain financial benefits coming into the pocket of private individuals in the ranks of top management of the company.

References :

Choi, Frederick. D. S. dan Gary K. Meek. 2010. International Accounting   Edisi    6 Buku 1. Jakarta:Salemba Empat.

Frederick D.S. Choi, dan Gary K. Meek. 2005. International Accounting, Buku 2 Edisi 5.  Jakarta: Salemba Empat.